30 Years Ago Today
It was 30 years ago today, October 19, 1987, when world stock markets crashed. The Dow Jones Industrial Average fell 508 points to 1738.74, a 22.6% drop that is still the largest one-day decline in the DJIA. I was managing a stockbroker firm then and I recall vividly the stunned funeral atmosphere that crept over us. Computer usage was then in its adolescence and simply getting current stock price quotes became impossible. Andrew Grove, then CEO of Intel, said it was like being in a theater where someone yells “Fire!
There were various events leading up to the crash. Stocks had raced up earlier in the year with the DJIA peaking in August up 44%. (It’s up 17% so far in 2017.) The DJIA lost 4.6% on Friday, October 16 with news of an unexpected increase in the trade deficit and a weakening dollar. Iran hit two U.S.-owned tankers with Silkworm missiles and and markets were unexpectedly closed in London as a hurricane struck northwestern Europe.
Panicked selling, never a viable investment strategy, began Monday morning in Asia before U.S. markets opened. By the end of the month, markets in Hong Kong, Australia and New Zealand had fallen 45%, 42% and 60%. The U.K. and the U.S. ended the month down 26% and 23%.
My clients often ask what factors then or in other crashes might provide signals for today’s markets. One factor may have been overvaluation in 1987, particularly in computer stocks that were more admired than understood. Psychology always seems to play a dominant role as human greed builds markets up and fear brings them down. “Portfolio insurance” was much in vogue in 1987, using computerized trading to ostensibly protect against losses. This failed as the computers spewed sell orders, as did human traders.
Investors will recall similar failures in the 2007-2009 market tumbles where computers were cleverly but erroneously used to aid overvaluing huge portfolios of substandard residential loans. Even without computers, greedy investors had driven stocks up tenfold in the nine years before the 1929 crash. Ominous signs of a slowing economy were overlooked and the DJIA gained another 20% in the summer of 1929. On September 20, London stocks crashed when some prominent British investors were jailed for fraud. Selling intensified in New York with a 11% loss on Thursday, October 24, followed by a brief respite on Friday before stocks lost 13% on Monday and then 12% on October 29 (“Black Tuesday”) on trading volume not to be exceeded for 40 years.
The Federal Reserve did everything wrong after the 1929 crash, both raising interest rates and decreasing the money supply, deepening a crippling inflation. The 1987 crash was almost self-correcting with the DJIA back above 2,000 in a few days, erasing its loss in two years and closing above 3,000 in 1991.
These 1,000-point milestones are less dramatic at today’s levels but attention must be paid to its brand new record above 23,000. Concurrently, the S&P 500 and the Nasdaq are also making new highs, strong confirmation that the path of least resistance for stocks remains upward. The Federal Reserve did everything right after recent dips and its current policy of maintaining liquidity with graduated interest rate increases is most encouraging for investors.
Each of these crashes and innumerable “corrections” of 5% to 10% panicked many investors, particularly those who had tried to make too much, too fast. With the DJIA now thousands of points higher, those who stuck with solid, well-managed companies in growing sectors did quite well.
Coherent (COHR-$257) is such a company. This new buy is the leading manufacturer of photonic-based (lasers) solutions entrenched globally in a broad range of industries. In classic California style, it was founded fifty years ago in a laundry room next to the washer and dryer, using part of a rain gutter in its first laser.
Sales are $855 billion, growing over the past five years at 27% annually. Earnings are accelerating and analysts estimate $3.44 to $3.59 for its September quarter, up from $1.65 last year. 2017 earnings will exceed $12.00, more than double 2016, yielding a quite reasonable valuation for its growth and history of innovations.
Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1995. [email protected] 949.494.1376/800.697.2622
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